MARKET OUTLOOK: Still searching for the new equilibrium

From the view of a trader, a market that is moving (in any direction) is good news as it gives rise to opportunities. The more volatile the greater the range of those opportunities, however most businesses prefer greater stability.

As we suggested last month we believe that we are experiencing a series of economic bubbles and, at least in the near term, the traditional economic cycle has become broken, uncertainty is rising and the final form of the new economic environment is still some time away. Since the last edition of Airline Business there has been a plethora of economic statistics where the common theme has been that GDP and industrial production have been worse than forecast. Inevitably, this has focused attention on how bad things might become.

With the number of Eurozone crisis meetings approaching 20, the underlying problems are still a long way from being resolved, and this too will be felt more widely. However, despite the dramatic headlines, a sense of perspective is needed. Although the onset of the downturn was almost four years ago, the process of adjustment continues. What we are seeing is a series of at times dramatic economic "aftershocks", as we move to an environment where global growth will undoubtedly be slower and lower.

Market adjustment is neither instant nor without cost. It is always a process where there will inevitably be, at least initially, too little adjustment to the new circumstances and then perhaps too much. Results in 2010 were assisted by the "capacity discipline" that reflected decisions taken in the third quarter of 2009 against a prevailing difficult economic background. Then the lagged effect of the capacity decisions coincided with benefits of what proved to be a relatively short lived economic bubble. But one that saw the reintroduction of capacity a year later when decisions were taken against the background of better economic data.

Another common element of most economic data is the time lag between the "event" occurring and it being reported. In this respect the lags in respective GDP, consumer spending and industrial production are often between two and three months - and are then subject to revision. As such, these are lagging indicators and are rather like driving only by looking in the rear-view mirror - it tells you what has passed but may not be a guide to the future.

We monitor a range of economic surveys and the purchasing managers' indices (PMI), which are both more immediate in the data provided than that from national statistical offices and also look forward in respect of perception. In all cases, it is direction and momentum that is the important indicator because a direct "read across" in the form of a ratio might be less useful. What we and most others are looking for is turning points. We are still in the adjustment process of moving to a new set of economic relationships and what for the medium term is likely to be the "new norm" and in this respect there will be no bounce back to previous conditions.

The latest economic survey from McKinsey provides an interesting perspective and has 56% of Eurozone respondents expecting that the position in the next six months will be no worse than now (38% the same, 18% better). Where 52% of the respondents saw current conditions as being worse than six months ago; 44% of those surveyed expected the next six months to be worse than now. In the developing markets, which include India and China, 52% of respondents saw current conditions as being worse than six months ago, but with 31% expecting no change and 38% expecting an improvement. In North America, 23% of people considered current conditions to be worse than six months ago, the same percentage of those who expect the conditions to be worse in six months' time.

Let's look at the Eurozone from a different perspective, this time using Markit manufacturing PMI data. While the overall figure was unchanged (at 45.1 representing a contraction), there were brighter spots for Ireland, the Netherlands and France. Yet Germany, whose manufacturing sector was expanding until recently, there has been something of a turnaround and the index reached its lowest point for three years. A by-product of the weakness here and elsewhere, has been a fall in commodity prices but it is the fall in demand that will more than offset these effects.

We are now moving into a period where capacity deployment for summer 2013 is being planned. Given that this is against a background of a generally downbeat and definitely uncertain economic environment, "capacity discipline" will inevitably be a feature of 2013. This is evidenced by a combination of reduced utilisation and more parked aircraft.

However, this is against the background of still rising aircraft production rates. As a result, unless there is a widespread turning point for the global economy, the best we can hope for are outcomes that are less worse than they might have been rather than better - the starting point however is more favourable than it was in 2008-09 - at least for now.